CASH MANAGEMENT: A BALANCING ACT

As market volatility continues, interest rates remain low and margins remain under pressure, the optimisation of cash is more important than ever. And optimisation is only achievable through effective cash management; making sure capital is working hard every day, while still being available and safe. Although this may sound relatively simple, it relies on an ever-more-complicated host of decisions about the relationship and balance between security, yield and liquidity – as well as the capabilities needed to then implement a corresponding strategy.

Successful cash management, at its core, requires cash to be in the right place and the right currency at the right time. As any treasurer knows, however, this aim can be quickly complicated by the size and global spread of an organisation – thanks to the difficulties presented by differing regional regulations as well as local variations between processes, formats and reporting requirements. Furthermore, the growth of new markets and new currencies, alongside today’s heftier regulatory burden, mean such difficulties are not going away. On the contrary, this task will continue to pose a challenge for institutions of all sizes.

Dhiru Tanna

With the appropriate tools and expertise, however, it is a challenge that can be addressed. And while cash management strategies will vary considerably between institutions, all boil down to striking the optimal balance between the core elements of security, yield and liquidity.

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Juggling requirements

In today’s post-crisis environment – one that remains beset by a range of socio-political upheavals alongside simmering economic concerns – security remains a prime concern. Indeed, in the continuous tug-of-war between risk and reward, risk looms larger than ever as banks and non-bank financial institutions (NBFIs) alike favour a cautious approach in response to market uncertainty. Not only must country and counterparty risks be taken into account, but also changes wrought by market evolution. As the global financial crisis recedes and the global economy recalibrates, the marketplace is changing radically; from the swathe of new regulations and changes in the roles and range of market participants (and suppliers of capital) to the effects of the debt overhang in the United States and Europe, and growing intra-emerging market commercial flows.

Although such a landscape may seem daunting, an up-to-date understanding of all market developments can be channelled into an effective risk mitigation strategy. Indeed, there is such a thing as being over-cautious. Consistently low interest rates and the need to invest for future development (with such investment increasingly relying on proprietary funding) mean inactive cash – and a low working capital ratio – is no longer an option. In fact, yield has become an equally prominent component again in the sense that cash, wherever situated, must be made to work hard to the benefit of the wider organisation.

Alongside these more strategic concerns runs the day-to-day need to maintain sufficient liquidity for daily settlement and operational demands. This includes the need for ready-to-implement contingency plans. Indeed, even just mistiming the right response can risk serious consequences. Ensuring funds are both available and accessible ultimately necessitates control – which in turn, stems, from a thorough understanding of, and visibility over, cash positions and movements regardless of denomination or geography.

A steadying hand

With this in mind, implementing an effective strategy that strikes the right balance between mitigating emerging risks while capturing new opportunities, all without hindering liquidity, is easier said than done.

Indeed, amidst a number of market and regulatory pressures, many banks and financial institutions may struggle to independently formulate and implement an appropriate cash management strategy. In-house strategies often fall short of the flexibility necessary for adapting to constant market changes – as do overly standardised third-party solutions.

With numerous factors to be considered, striking the right balance in cash management requires a transparency and control that is often difficult for in-house or third parties to distinguish and achieve. With the right guidance and tools however, organisations can guarantee their cash is working as effectively as possible. Certainly the right partner – through consultation and collaboration – can provide the support necessary to implement flexible and individualised investment strategies and solutions.

Certainly, by leveraging the expertise of a specialist provider, treasurers can access a range of innovative solutions – such as a centralised cash investment portal that allows clients to invest directly in individual money market instruments, such as money market securities, (multicurrency) money market mutual funds and liquidity funds. Such tools can provide a door to pooled investments in a wide range of short-term, highly-rated funds in different currencies, with information on credit ratings, average maturities and current holdings instantly available, while providing reporting transparency. Furthermore, a single account summary – summarising all account holdings and intra-day position reports – relieves the administrative burden. Risk mitigation can also be enhanced, as collateral margins can be segregated away from counterparties, and by linking an existing account to the platform, the settlement of daily payment flows is ensured.

Of course, such tools and solutions – however innovative – will be largely ineffective if not applied intelligently. Knowing how best to implement such solutions requires not just an understanding of the solutions themselves, but also up-to-date knowledge around evolving market developments.

All of this requires specialist expertise – both in keeping abreast of market fluctuations that have implications for cash decisions, and in injecting transparency over investment portfolios and cash flows.

Finally, institutions should look to partner with a provider that offers support on a non-compete basis – removing any concerns around competition over corporate clients.

While upheavals and uncertainty will no doubt remain a feature of the economic landscape, a collaborative approach will help ensure financial institutions are best-placed to capitalise on new investment opportunities as the market continues to evolve.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.